Economics

Output: A world of trouble

A speech from the Federal Reserve Bank vice chairman suggests worrying factors are behind the UK's productivity crisis

August 12, 2014
Stanley Fischer: Bearer of bad news. © World Economic Forum
Stanley Fischer: Bearer of bad news. © World Economic Forum

A speech given this week by Stan Fischer, Vice Chairman of the Federal Reserve Bank, got to the core of perhaps the most important lesson of “The Great Recession” that hit the global economy after the crisis of 2008.

Fisher addressed three elements of the post crisis economic landscape: the impact of the crisis on output; financial reform; and monetary policy. Of the three, it was the first that contained perhaps the starkest lesson.

He began by noting that global growth has been “steady, if unspectacular,” since the financial crisis, citing IMF data which suggested that in 2014, world output would be 3.4 per cent and next year, 4 per cent. “But,” said Fischer, “and this is no small ‘but’—the global economy has been disappointing. With few exceptions, growth in the advanced economies has underperformed expectations of growth as economies exited from recession."

He went on to explain that research conducted by the Federal Reserve into previous crises showed that since the 2008 crash, “recoveries in the advanced economies have been well below average." In addition, “the slowing is broad based,” with economies across the world, especially that of China, showing disappointing results. This persistent underperformance, Fischer said, has caused “a general reassessment of longer-run growth.” The Fed’s own US growth forecasts are now lower than in 2009, and “the IMF's expectation for long-run global growth is now a full percentage point below what it was immediately before the Global Financial Crisis.”

Fischer raised the possibility that this downward shift in growth was the product of a cyclical shift, along the line of that predicted by the economists Carmen Reinhart and Kenneth Rogoff (look out for Rogoff’s review of Martin Wolf’s new book in the forthcoming September issue of Prospect). “But,” said Fischer, “it is also possible that the underperformance reflects a more structural, longer-term, shift in the global economy, with less growth in underlying supply factors.”

One of those factors is the decline in investment, which Fischer says “may be contributing to a slowdown in longer-run output growth.” Companies are not investing, despite the low interest rates and access to credit that many firms now enjoy. This slowing of the rate of growth of the capital stock despite strong profits is “causing concerns over the long-run prospects for the recovery of investment.” What goes for the US in this case is applicable to the UK, which has also experienced low levels of business investment.

Fischer then turned to productivity, which in the US, as in the UK, is weak. The explanation he gave for this was close to that offered by Professor Robert Gordon of Northwestern, who has found that advances in technology have all largely delivered their economic benefits. As such, the IT revolution, so called, has few more economic benefits left to give.

The most crucial lesson of Fischer’s vivid and engaging speech was that countries such as Britain cannot regard themselves as closed, discreet economic units. The crisis—its causes, effects and aftermath—were global. The economic weakness that has been felt in Britain has been experienced elsewhere and in a similar form. As Fischer made abundantly clear, the meagre recovery, with its dwindling productivity growth, has not been a uniquely British experience.

The worrying conclusion is that Britain’s declining productivity levels are less a function of the government's economic policies and more a consequence of global, macroeconomic pressures. The debate in Britain on the question of inequality then becomes cast in a somewhat different aspect to that which it has taken on so far, as the central assumption at the heart of that argument—that in Britain there is a determined relationship between the incomes of the nation's rich and poor—is called into doubt.

Fischer’s speech is a sharp reminder that economic analysis cannot be conducted along parochial, national lines. If the causes of the global financial crisis are to be understood, then the global circumstances that caused it must be fully understood. The same can be said of the recession that followed the crisis—and also of the recovery. Although it offends the national pride to recognise it, Britain’s economy is subject to global macroeconomic forces that are entirely out of its control. Only once this is fully understood can a realistic picture emerge of how Britain's economy might find its way back to full health.